Binding labour settlement payments and a bona fide shift to mercantile bonus accounting both supported deductible business expenditure.

Additional employee payments made under a binding labour settlement were treated as business expenditure, and the deduction was allowable under section 37 because the liability arose from statutory compulsion and business necessity rather than bonus within the Payment of Bonus Act. The assessee was also permitted to adopt a bona fide change from claiming bonus on payment basis to claiming accrued liability on a mercantile basis under section 145(1), so the provision for bonus in the year of change was deductible. Both claims were accepted, and the revenue appeal failed, with consequential adjustment to the surtax assessment.

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Issues: (i) Whether the additional amount paid to employees under a settlement and agreement was allowable as a deduction; (ii) Whether the assessee, having earlier claimed bonus expenditure on payment basis, could also claim deduction for the liability provided on mercantile basis in the year of change.

Issue (i): Whether the additional amount paid to employees under a settlement and agreement was allowable as a deduction.

Analysis: The additional payment was made pursuant to an agreement and a memorandum of settlement under the Industrial Disputes Act. It was binding on the assessee and arose from statutory compulsion and business necessity. The payment was not treated as bonus within the limit of the Payment of Bonus Act, but as an expenditure incurred under a binding settlement.

Conclusion: The deduction was allowable under section 37 of the Income-tax Act, 1961 and was in favour of the assessee.

Issue (ii): Whether the assessee, having earlier claimed bonus expenditure on payment basis, could also claim deduction for the liability provided on mercantile basis in the year of change.

Analysis: The assessee had previously been claiming only actual bonus payments, but in the relevant year it for the first time made a provision for the year's liability and claimed the same. The method of accounting under section 145(1) governed computation of income, and the assessee was entitled to adopt a bona fide change so as to bring the bonus claim in line with its mercantile system. The year of change could legitimately reflect both the prior year's payment-based claim and the current year's accrued liability.

Conclusion: The deduction for the provisioned bonus liability was allowable and the issue was in favour of the assessee.

Final Conclusion: The additional employee payment and the bonus provision were both deductible, the revenue appeal failed, and the assessee obtained substantial relief with the surtax assessment adjusted consequentially.

Ratio Decidendi: A liability arising from a binding labour settlement is deductible as business expenditure, and an assessee may, if bona fide, change from a payment-based bonus claim to a mercantile claim so that accrued liability is recognized in the year of change.

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